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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

CLOSING ENTRIES (NET INCOME) Set up T accounts for Major Advising based on the work sheet in Exercise 6-1A and the chart of accounts provided below. Enter the existing balance for each account. Prepare closing entries in general journal form. Then post the closing entries to the T accounts.

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To determine

Prepare closing journal entries and post those entries to the T accounts.

Explanation

Closing entries: The journal entries prepared to close the temporary accounts to permanent account are referred to as closing entries. The revenue, expense, and dividends accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Prepare the closing entries:

DateAccounts and Explanation

Account

Number

Debit

 ($)

Credit ($)
January 31Advertising fees (SE–)4014,140 
 Income Summary (SE+)313 4,140
 (To close the revenue account.)   
     
January 31Income summary (SE–)3131,920 
 Wages expense (SE+)511 700
 Advertising expense (SE+)512 90
 Rent expense (SE+)521 500
 Supplies expense (SE+)524 150
 Phone expense (SE+)525 67
 Electricity expense (SE+)533 48
 Insurance expense (SE+)535 89
 Gas and oil expense (SE+)538 53
 Depreciation expense (SE+)541 200
 Miscellaneous expense (SE+)549 23
 (To close the expense accounts.)   
     
January 31Income Summary (SE–)3132,220 
 EDM, Capital (SE+)311 2,220
 (To close the income summary accounts)   
     
January 31EDM, Capital (SE–)311900 
 EDM, Drawings (SE+)312 900
 (To close withdrawals account.)   

Table (1)

Working Note:

Calculate the amount of EDM capital (transferred).

EDM Capital =(Total Revenues-Total Expenses)=($4,140$1,920)=$2,220

Revenue account: In this closing entry, the advertising fees account is closed by transferring the amount of advertising fees account to Income summary account in order to bring the revenue account balance to zero. Hence, debit advertising fees account and credit Income summary account.

Expense account: In this closing entry, all expense accounts are closed by transferring the amount of total expense to the Income summary account in order to bring the expense account balance to zero. Hence, debit the Income summary account and credit all expenses account.

Income summary account: Income summary account is a temporary account. This account is debited to close the net income value to EDM capital account.

EDM capital is a component of stockholders’ equity account. The value of EDM capital increased because net income is transferred. Therefore, it is credited.

Withdrawals account: EDM capital is a component of owner’s equity. Thus, owners ‘equity is debited since the capital is decreased on owners’ drawings.

EDM withdrawals are a component of owner’s equity. It is credited because the balance of owners’ withdrawals account is transferred to owners ‘capital account.

T-account: The condensed form of a ledger is referred to as T-account. The left-hand side of this account is known as debit, and the right hand side is known as credit.

Posting the closing entries to the T- account:

Cash Account No - 101
DateDetailsDebit ($) DateDetailsCredit ($)
 Beginning balance1,339  Ending balance1,339
       
 Beginning balance1,339  

Table (2)

Accounts ReceivableAccount No - 122
DateDetailsDebit ($) DateDetailsCredit ($)
 Beginning balance935  Ending balance935
       
 Beginning balance935  

Table (3)

SuppliesAccount No - 141
DateDetailsDebit ($) DateDetailsCredit ($)
 Beginning balance346  Ending balance346
       
 Beginning balance346  

Table (4)

Prepaid InsuranceAccount No - 145
DateDetailsDebit ($) DateDetailsCredit ($)
 Beginning balance800  Ending balance800
       
 Beginning balance800  

Table (5)

Office EquipmentAccount No - 181
DateDetailsDebit ($) DateDetailsCredit ($)
 Beginning balance3,500  Ending balance3,500
       
 Beginning balance3,500  

Table (6)

Accumulated DepreciationAccount No - 181
DateDetailsDebit ($) DateDetailsCredit ($)
 Ending balance200  Beginning balance200
       
    Beginning balance200

Table (7)

Accounts PayableAccount No - 202
DateDetailsDebit ($) DateDetailsCredit ($)
 Ending balance1,000  Beginning balance1,000
       
    Beginning balance1,000

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